The  Texas  Railroad  Stock 
and  Bond  Law 


AN  ADDRESS 

BEING  A  PLEA  FOR  A  CHANCE  IN  BEHALF  OF 
TEXAS  RAILROAD  MEN 

BY  R.  C.  DUFF,  OF  HOUSTON,  TEXAS 


DELIVERED  AT 

AUSTIN,  TEXAS,  FEBRUARY  10,  1911 


Before  the  Committee  on  Common  Carriers  of  the 
House  of  Representatives  of  the  Thirty-second  Legis¬ 
lature,  the  Committee  having  under  consideration 
House  Bill  No.  303,  by  Rowell,  proposing  to  amend 
the  Stock  and  Bond  Law  (1)  so  as  to  authorize  the  re¬ 
valuation  by  the  Texas  Railroad  Commission,  of  Texas 
Railroads,  for  stock  and  bond  purposes,  at  the  expense 
of  such  Railroads,  and  not  oftener  than  once  in  five 
years,  and  (2)  so  as  to  harmonize  such  valuation  to 
the  valuation  fixed  by  the  State  Tax  Board  for  the 
purposes  of  Taxation. 


To  the  Honorable  the  Committee  on  Common  Carriers  of  the 
House  of  Representatives  of  the  Thirty-Second  Legisla¬ 
ture  of  the  State  of  Texas : 

This  argument,  submitted  in  support  of  House  Bill  No.  303, 
proposing  amendments  to  our  railroad  stock  and  bond  law,  is 
a  prayer,  a  deep,  sincere  and  fervent  prayer,  that  this  legisla¬ 
ture  will  by  the  adoption  of  these  proposed  amendments  take  a 
step  toward  reopening  the  door  of  Opportunity,  in  respect  of 
independent  railroad  enterprises  in  Texas,  in  favor  of  citizen? 
of  this,  our  own  State. 

For  a  number  of  years  the  rigors  of  our  Texas  Statutes  have 
been  too  severe  for  new  men,  young  men  with  ideas  and  ambi¬ 
tions  larger  than  their  means,  to  make  much  headway  in  thr 
railroad  field  in  Texas.  Yet  it  is  such  men  who  build  new  rail 
roads.  Similarly,  the  burdens  of  our  legislation  have  been  toe 
heavy  for  the  smaller  railroads  to  bear,  and  one  by  one  they  an 
giving  up  the  struggle,  their  owners  only  too  glad  to  sell  out  tc 
the  larger  systems  at  prices  frequently  representing  heaw 
losses.  The  tendency  for  years  has  been  and  is  toward  thi 
extinction  of  the  small  and  independent  lines,  leaving  the  rail 
road  field  occupied  only  by  the  great  systems.  The  latter  havi 
been  able  to  stand  the  strain,  first,  because  of  their  greater  siz 
and  strength,  and  second,  and  more  especially,  because  they  ar 
owned  by  outside  system  lines  enjoying  a  credit  sufficient  t< 
enable  them  to  command  some  money  to  protect  their  Texa 
investments. 

THE  PRESENT  SITUATION  IN  TEXAS. 

On  June  30,  1909  (the  latest  date  for  which  accurate  figure 
are  available),  the  railroad  mileage  of  the  State,  omitting  rail 
road  terminal  companies,  was  divided  between  outside  syster 
and  independent  companies,  substantially  as  follows . 

2 


SYSTEM  LINES. 


Abilene  &  Northern  Ry.  Co.  (Col.  &  Sou.  System)  .  38.70 
Beaumont,  Sour  Lake  &  Western  Ry.  Co.  (Frisco)  .  82.79 

Cane  Belt  Railroad  (Santa  Fe) .  107.84 

Chicago,  Rock  Island  &  Gulf  Ry.  (C.  R.  I.  &  P.) .  .  438.99 

Dallas,  Cleburne  &  Southwestern  (M.  K.  &  T.) . .  . .  9.82 

Denison,  Bonham  &  New  Orleans  (M.  K.  &  T.) .  .  .  24.17 

Denison,  Pacific  &  Suburban  Ry.  (T.  &  P.) .  7.63 

Eastern  Texas  Railroad  Co.  (S.  L.  S.  W.) .  30.30 

El  Paso  &  Northeastern  Ry.  (E.  P.  &  S.  W.  System)  19.32 

El  Paso  &  Southwestern  Ry.  Co.  of  Texas  (E.  P.  & 

S.  W.  System)  . .  4.69 

Fort  Worth  &  Denver  City  (Colorado  &  Southern)  .  454.14 

Fort  Worth  &  Rio  Grande  Ry.  Co.  (Frisco) .  1 83.39 

Galveston,  Harrisburg  &  San  Antonio  Ry.  Co.  ( Sou. 

F^ac.)  .  1,332.01 

Galveston,  Houston  &  Henderson  R.  R.  (M.  K.  &  T. 

and  Gould  Systems)  .  46.49 

Gulf  &  Interstate  Ry.  Co.  of  Texas  (Santa  Fe) ....  70.88 

Gulf,  Beaumont  &  Great  Northern  (Santa  Fe) .  77-78 

Gulf,  Beaumont  &  Kansas  City  (Santa  Fe) .  62.62 

Gulf,  Colorado  &  Santa  Fe  Ry.  (A.  T.  &  S.  F.) .  .  .  .  1,049.67 

Houston  East  &  West  Texas  Ry.  (Southern  Pacific)  190.94 

Houston  &  Texas  Central  R.  R.  (Southern  Pacific)  789.01 

International  &  Great  Northern  R.  R.  (Gould 

System)  .  1,106.00 

Jasper  &  Eastern  (Santa  Fe) .  17.50 

Kansas  City,  Mexico  &  Orient  (K.  C.  M.  &  O. 

System)  .  160.30 

Marshall  &  East  Texas  Ry.  (Union  Trust  Co.  of  St. 

Louis)  .  72.55 

Missouri,  Kansas  &  Texas  Ry.  Co.  of  Texas  (M.  K. 

&  T.  System)  .  1,121.72 

Orange  &  Northwestern  Ry.  Co.  (Frisco) .  61.55 

Paris  &  Great  Northern  R.  R.  Co.  (Frisco) .  16.94 

^ Pecos  &  Northern  Texas  Ry.  Co.  (Santa  Fe) .  151.82 

Pecos  River  R.  R.  Co.  (Santa  Fe) .  54-27 

3 


* 

ar 


Rio  Gfande  R.  R.  (Frisco)  .  22.50 

Rio  Grande  &  El  Paso  (Santa  Fe) .  20.17 

St.  Louis,  Brownsville  &  Mexico  (Frisco) .  411.19 

St.  Louis  &  San  Francisco  Ry.  Co.  of  Texas  (Frisco 

System)  . 85.63 

St.  Louis  Southwestern  Ry.  (Gould  System) .  695.21 

San  Antonio  &  Aransas  Pass  Ry.  (W.  H.  McIntyre, 

New  York)  .  723. 80 

Southern  Kansas  Ry.  Co.  of  Texas  (Santa  Fe)  ....  125.07 

Texarkana  &  Fort  Smith  Ry.  Co.  (K.  C.  S.  System)  81.10 

Texas  &  Gulf  Ry.  (Santa  Fe) .  73-55 

Texas  &  New  Orleans  R.  R.  Co.  (Southern  Pacific)  .  452.31 

Texas  &  Pacific  Ry.  Co.  (Gould  System) .  1,038.16 

Texas-Mexican  Ry.  (National  Lines  of  Mexico) .  .  .  161.84 

Trinity  &  Brazos  Valley  Ry.  (C.  &  S.  and  Rock 

Island)  .  302.82 

Weatherford,  Mineral  Wells  &  Northwestern  Ry. 

(Gould  System)  .  41.20 

Wichita  Falls  &  Oklahoma  (Colorado  Southern) .  22.80 

Wichita  Valley  Ry.  Co.  (C.  &  S.) .  52.20 

Wichita  Valley  R.  R.  Co.  (C.  &  S.) .  60.70 


Total  . 12,164.08 

Being  93.2  per  cent,  of  the  entire  mileage. 

INDEPENDENT  LINES. 

Abilene  &  Southern  Ry.  Co.  (Morgan  Jones  and 

<  Associates)  .  27.41 

Asherton  &  Gulf  Ry.  Co.  (Asher  Richardson  and 

Associates)  .  11.70 

Beaumont  &  Great  Northern  R.  R.  (Wm.  Carlisle) .  33-45 

Burr’s  Ferry,  Browndel  &  Chester  Ry.  Co.  (John 

H.  Kirby)  .  11.12 

Caro  Northern  Ry.  Co.  (John  G.  Saner  and  Asso¬ 
ciates)  .  16.62 

Groveton,  Lufkin  &  Northern  Ry.  (Trinity  County 

Lb.  Co.)  .  21.15 

4 


Hearne  &  Brazos  Val]ey  (G.  C.  Tegethoff,  New 

York)  .  19.74 

Houston  &  Brazos  Valley  (Felix  Jackson) .  20.00 

Livingston  &  Southeastern  Ry.  Co.  (Knox  Lumber 

Co.)  .  7.20 

Moscow,  Camden  &  San  Augustine  Ry.  ( W.  T. 

Carter)  .  7.00 

Nacogdoches  &  Southeastern  R.  R.  (Frost-Johnson 

Lbr.  Co.)  .  13.19 

Quanah,  Acme  &  Pacific  R.  R.  (Sam  Lazarus  of  St. 

Louis  and  Associates) .  2.25 

Rio  Grande  &  Eagle  Pass  Ry .  28.10 

Roscoe,  Snyder  &  Pacific  Ry.  (E.  S.  Hughes  and 

Associates)  .  31.12 

Shreveport,  Houston  &  Gulf  R.  R.  (L.  V.  Garrison 

and  Associates) .  9.00 

Southwestern  Railroad  Company .  19.50 

Stephenville  North  &  South  Texas  Ry.  Co .  44.38 

Sugarland  Railroad  Company .  14.20 

Texas,  Arkansas  &  Louisiana  Railway .  7.70 

Texas  Central  R.  R.  Co.  (H.  K.  McHarg  and  others, 

New  York)  . 268.00 

Texas  Midland  R.  R.  (E.  H.  R.  Green,  New  York).  111.18 

Texas  Short  Line  Railway  Company .  9.36 

Texas  Southeastern  R.  R.  Co.  (T.  L.  L.  Temple  and 

Associates)  .  21.65 

Texas  State  Railroad  .  24.00 

Timpson  &  Henderson  Railway .  8.00 

Trinity  Valley  &  Northern  Ry.  (Dayton  Lbr.  Co.)  .  10.00 

Trinity  Valley  Southern  R.  R.  (T.  S.  Foster  and 

Associates  .  6.00 

Wichita  Falls  &  Northwestern  Ry.  (Kell  &  Kemp)  17.10 
Wichita  Falls  &  Southern  Ry.  Co.  (Kell  &  Kemp) .  52.36 

Wichita  Falls  Railway  Co.  (Kell  &  Kemp) .  17. 96 


Total  .  890.44 

Being  only  6.8  per  cent,  of  the  entire  mileage. 


5 


Since  the  date  of  above  lists  the  owners  of  the  following 
independent  lines  have  given  up  the  struggle,  and  have  sold  out 
their  properties  to  system  lines : 

Miles. 

1.  The  Texas  Central  Railroad  to  the  M.  K.  &  T. .  .  268.00 

2.  The  Stephenville  North  &  South  Texas  Ry.  to  St. 

Louis  Southwestern  .  44. 38 


312.38 

It  would  be  interesting  to  compile,  but  it  is  now  difficult  to 
recall  the  long  list  of  independent  lines,  the  projectors  of 
which  in  days  gone  by  set  out  with  splendid  plans  and  high 
hopes,  each  project  having  one  or  more  central  figures  who  prob¬ 
ably  could  see  no  reason  why  they  in  Texas  might  not  duplicate 
the  mighty  achievements  of  such  great  builders  as  Mr.  James 
J.  Hill  and  General  Grenville  M.  Dodge  (men  who  in  youth 
and  poverty  conceived  vast  railroad  plans,  found  the  money 
to  finance  them  and  themselves  carried  them  to  magnificent 
fruition,  in  territory  ‘ar  less  favorable  than  Texas)  only  to 
find,  after  building  .enty,  fifty  or  possibly  an  hundred  miles 
of  track,  and  exhai  Mng  the  personal  funds  of  themselves  and 
associates,  and  efforts  to  enlist  new  capital  necessary,  that  the 
doors  of  every  money  market  in  the  world  were  closed  against 
them;  then  amidst  the  stress  and  strain  of  operating  accord¬ 
ing  to  our  expensive  laws  new  and  half-born  projects,  saw 
hope  fade,  and  were  only  too'  glad  if,  as  was  not  always  the 
case  they  could  escape  absolute  financial  wreck  by  turning 
over  their  properties  at  some  price  to  the  nearest  system  in 
their  section. 

In  my  own  day  and  under  my  own  observation,  the  follow¬ 
ing  promising  projects  have  passed  out  of  the  hands  of  the 
men  who  in  whole  or  part  originated  them  into  the  hands  of 
the  larger  systems : 

1.  The  Gulf,  Beaumont  &  Kansas  City  Ry.  Co.  and  the 
Gulf,  Beaumont  &  Great  Northern  R.  R.  Co.,  John  Henry 
Kirby,  to  the  Santa  Fe. 


6 


2.  The  Cane  Belt  Railway,  Dunovant  &  Elclridge  and  Jon¬ 
athan  Lane,  to  the  Santa  Fe. 

3.  The  Orange  &  Northeastern  R.  R.  Co.,  L.  Miller  and 
W.  H.  Stark  and  associates,  to  the  Frisco. 

4.  The  Beaumont,  Sour  Lake  &  Western  Ry.  Co.,  Wm. 
Weiss  and  others,  to  the  Frisco. 

5.  The  Trinity  &  Brazos  Valley  Ry.  Co.,  R.  H.  Baker  and 
others,  to  the  Rock  Island  and  Colorado  &  Southern. 

6.  The  Gulf  &  Interstate  R.  R.  Co.,  L.  P.  Featherstone 
and  others,  to  the  Santa  Fe. 

7.  Stephenville  North  &  South  Texas  R.  R.  Co.,  to  the  St. 
Louis  Southwestern. 

8.  The  Texas  Central  R.  R.  Co.,  H.  K.  McHarg  and 
others,  to  the  M.  K.  &  T. 

9.  The  Galveston,  La  Porte  &  Houston  Ry.,  Judge  T 
W.  Ford,  J.  Waldo,  M.  T.  Jones  and  others,  to  the  Southern 
Pacific. 

10.  The  old  Georgetown  and  Granger  Railroad,  known 
as  the  Link  Line,  promoted  by  Emzy  Taylor,  which,  as  I  re¬ 
call,  after  Mr.  Taylor’s  death,  was  taken  over  by  the  M.  K. 
&  T. 

11.  The  Houston  Belt  &  Magnolia  Park  Railroad  at  Hous¬ 
ton,  foreclosed  on  by  creditors  and  purchased  by  the  I.  &  G.  N. 

12.  Texas  Trunk  Railroad,  which  after  a  receivership, 
passed  into  the  hands  of  the  Southern  Pacific. 

Possibly  one  or  more  of  these  transactions  signified  a  meas¬ 
ure  of  success.  In  most  instances  they  represented  the  last 
act  in  pitiable  dramas  where  heavy  financial  loss  occurred  to 
the  original  promoters,  and  in  some  cases  suicide  and  death 
followed  in  the  train  of  financial  disaster. 

The  path  of  promotions  of  railroads  by  individuals  in  Texas 
during  the  past  18  years  has  been  strewn  with  wrecks,  receiver¬ 
ships  and  trouble. 


THE  HEART  OF  THE  TROUBLE. 


If  the  inside  facts  were  available,  it  would  be  found  that 
while  not  the  sole  trouble,  the  heart  of  the  trouble  of  all  of  the 
independent  lines  has  been  and  is  our  Texas  Stock  and  Bond 
law. 

Texas,  out  of  all  the  States  of  the  American  Union,  and 
out  of  all  the  countries  on  earth,  is  the  only  State  that  ever 
passed  a  law  having  the  characteristics  of  that  law,  and  al¬ 
though  it  has  been  in  operation  and  under  the  observation  of 
the  country  since  April  8,  1893,  a  period  of  eighteen  years,  not 
a  single  other  State,  not  even  Oklahoma,  many  of  which  have 
copied  our  other  railroad  statutes,  has  ever  deemed  it  wise  to 
adopt  it. 

The  reason  is  that  the  whole  law  was  based  on  mistakes  con¬ 
cerning  the  law  and  concerning  facts.  A  law  so  predicated 
could  not  fail  to  wreak  injustice  and  disaster  to  the  concerns 
against  which  it  was  directed. 

THE  MISTAKE  CONCERNING  LAW. 

The  mistake  concerning  law,  was  the  erroneous  opinion  held 
by  Governor  Hogg  and  probably  by  all  who  favored  the  pass¬ 
age  of  the  law  in  1893,  that  the  United  States  Supreme  Court 
had  held  or  would  hold  that  there  was  an  intimate  relation¬ 
ship  between  the  amounts  of  stock  and  bonds  outstanding 
against  railroads,  and  the  rates  charged  and  to  be  charged 
against  traffic  for  transportation,  viz. :  that  rates  fixed  by  our 
railroad  commission  must  suffice  to  enable  railroads  out  of 
their  net  earnings,  to  pay  interest  on  whatever  amount  of 
bonds  might  be  outstanding  and  dividends  on  whatever  amount 
of  stock  might  be  issued.  There  may  have  been  some  ground 
for  such  an  opinion  at  the  time  of  the  enactment  of  the  law. 
There  is  absolutely  no  ground  for  such  an  opinion  at  this  time. 
The  question  has  been  absolutely  settled  by  the  Supreme  Court, 
and  it  is  the  reasonable  value  of  the  property  of  railroads  de¬ 
voted  to  the  transportation  service,  fairly  ascertained,  which  it 


8 


takes  as  the  factor  on  which  to  figure  the  right  to  a  reasonable 
return,  and  if  there  be  a  discrepancy  either  way  as  between 
the  reasonable  value  of  railroad  property  and  the  amount  of 
stock  and  bonds,  the  latter  becomes  an  absolutely  negligible 
factor,  of  positively  no  moment,  in  the  determination  of  rate 
cases. 

I  attach  hereto  an  appendix,  listing  decisions  by  the  United 
States  Supreme  Court,  beginning  with  Smyth  vs.  Ames,  169 
U.  S.,  466,  followed  by  decisions  of  the  United  States  Circuit 
Courts  of  Appeals  and  District  Courts  and  by  the  Supreme 
Courts  of  various  states,  all  confirming,  following  and  en¬ 
forcing  the  doctrine  last  stated. 

And  I  should  add  that  according  to  these  same  decisions, 
where  rates  for  the  transportation  of  freight  or  passengers 
have  been  or  may  be  attacked  by  the  Texas  railroads,  as  being 
unreasonably  low,  the  low  valuations  of  our  railroads  by  our 
commission  or  the  small  amount  of  stocks  and  bonds  outstand¬ 
ing,  have  not  been  and  will  not  be  factors  of  any  moment  for 
the  maintenance  of  such  rates.  The  courts  will  look  to  the 
present  reasonable  value  of  the  property  devoted  to  the  trans¬ 
portation  service;  nor  do  they  hold  to  the  cost  of  original  con¬ 
struction  ;  they  look  to  present  reasonable  value ;  such  being  the 
case,  if  the  railroads  find  themselves  hampered  in  financing 
their  necessities  by  the  present  limitations  of  our  stock  and 
bond  law,  it  is  gratuitous  bad  policy  to  further  maintain  such 
restrictions;  the  railroads  are  harmed  or  hampered  without 
any  corresponding  advantage,  gain  or  saving  to  the  State  or  to 
any  shipper  in  the  State. 

Personally,  I  have  attended  for  several  years  most  of  the 
important  hearings  held  by  the  Railroad  Commission  of  this 
State,  having  reference  to  proposed  reductions  of  both  freight 
and  passenger  rates,  and  there  was  never  an  occasion  according 
to  my  observation  that  the  Commission,  in  respect  of  their  action, 
remotely  considered  either  the  amount  of  stocks  and  bonds 
outstanding  or  even  the  values  of  the  railroads  the  reduction 


9 


of  whose  rates  was  under  consideration.  If  any  point  was 
made  concerning  either  factor,  it  was  purely  academic  and  un- 
influential.  If  the  amount  of  stock  and  bonds  outstanding  en¬ 
titled  the  holders  to  demand  rates  to  pay  interest  and  dividends 
on  same,  assuming  six  per  cent,  to  be  a  fair  return  on  the 
stock  (as  has  been  held  by  a  Federal  Circuit  Court  of  Ap¬ 
peals,  in  respect  of  the  fair  return  on  the  value  of  the  railroad 
property),  there  was  never  an  hour  since  the  establishment  of 
the  Commission  when  it  could  have  reduced  rates,  because  the 
net  income  of  the  Texas  railroads,  considering  them  as  a 
whole,  after  deducting  for  taxes,  has  never  at  any  time  sufficed 
to  pay  interest  and  such  dividends. 

And  yet  in  that  time  the  Commission  has  made  and  main¬ 
tained  hundreds  of  rate  reductions.  The  theory  mentioned 
was  never  influential  with  our  railroad  commission  in  rate 
making. 

There  is,  therefore,  no  influential  relationship  between  the 
amount  of  stock  and  bonds  issued  by  railroads  and  the  rates 
which  by  law  they  are  authorized  to  charge  for  the  transporta¬ 
tion  of  freight  and  passengers ;  and  in  so  far  as  that  considera¬ 
tion  entered  into  the  enactment  of  our  stock  and  bond  law,  or 
now  enters  into  its  further  maintenance  on  our  statute  books, 
the  reason  for  the  law  has  failed. 

THE  MISTAKE  CONCERNING  FACTS. 

A  profound  error  indulged  by  those  who  were  responsible 
for  the  enactment  of  the  stock  and  bond  law  was  that  its  im¬ 
mediate  effect  would  be  to  place  Texas  securities  on  a  high 
plane,  render  them  much  sought  after,  and  thereby  make  easy 
the  promotion  of  new  railroad  ventures.  I  know  this  was 
Governor  Hogg’s  opinion.  There  were  not  wanting  men  at¬ 
tempting  operations  in  the  railroad  field  reposing  confidence 
in  his  views,  and  immediately  following  the  expiration  of  his 
second  term  in  office,  he  was  employed  by  Emzy  Taylor  and 
associates,  who  were  then  promoting  the  Link  Line,  to  nego- 


10 


tiate  the  sale  of  bonds  to  be  issued  by  them  under  the  then 
new  stock  and  bond  law.  I  was  quite  a  young  man  at  that 
time,  but  enjoyed  the  personal  friendship  of  Governor  Hogg, 
and  I  sat  by  his  side  one  night  down  here  in  the  lobby  of  the 
Driskill  Hotel,  and  heard  him  discuss  his  expectations  concern¬ 
ing  the  flotation  of  these  securities.  He  was  then  preparing 
for  a  trip  to  New  York,  and  he  spoke  with  utmost  confidence 
of  the  favorable  consideration  he  felt  people  with  money, 
habituated  to  purchasing  railroad  securities  the  amount  or 
which  was  controlled  only  by  the  will  or  judgment  of  the  pro¬ 
moters,  must  extend  to  lines  of  securities  put  out  under  the 
Texas  stock  and  bond  law.  He  was  confident  that  he  would 
be  able  to  place  the  Link  Line  bonds  to  realize  well  above  par. 
It  would  seem  that  there  can  be  no  question  of  the  sincerity  of 
himself  nor  of  the  Link  Line  people  in  this  view,  for,  first  of  all 
the  many  who  have  since  attempted  it,  they  put  the  proposi¬ 
tion  to  the  test,  Mr.  Taylor  and  associates,  I  understand,  in¬ 
volved  themselves  to  the  extent  of  their  means,  heavily  in  the 
undertaking,  and  Governor  Hogg  went  out  into  the  moneyed 
world,  where  all  of  us  must  go,  to  interest  new  capital  in  the 
Link  Line  project.  He  suffered  the  same  experience  that  most 
of  us  have  since  usually  suffered  when  dealing  with  a  Texas 
railroad  not  built,  but  only  proposed.  He  could  not  sell  a 
single  bond.  After  months  of  effort,  he  gave  it  up  and  re¬ 
turned  to  Texas.  Soon  after  Mr.  Taylor’s  bank  suspended, 
and  he  took  his  own  life. 

There  was  then  and  there  is  today  practically  no  market  for 
Texas  railroad  securities . 

Take  today  the  list  of  securities  traded  in  every  day  at  the 
greatest  market  in  this  country,  New  York.  There  more  buy¬ 
ers  and  more  sellers  meet  than  elsewhere  throughout  this  en¬ 
tire  country,  and  the  brokerage  firms,  thousands  of  them,  are 
keen  to  handle  every  security,  note  or  commercial  obligation 
that  any  of  their  hundreds  of  thousands  of  investing  customers 
throughout  the  world  signify  the  slightest  desire  to  purchase. 
Take  the  transactions  of  any  day,  any  month  or  any  year.  You 


ll 


will  not  find  the  record  of  a  sale  per  month  of  any  Texas  rail¬ 
road  security.  And  yet  there  are  locked  up  in  the  vaults  of 
that  city,  hundreds  of  millions  of  dollars,  par  value,  of  Texas 
railroad  securities,  taken  over  in  mass  by  the  old  systems,  and 
being  used  by  them,  as  far  as  they  can  so  utilize  them,  as  col¬ 
lateral.  If  there  were  only  a  slight  demand  from  the  investing 
public  for  Texas  bonds,  a  mass  of  them  would  come  forth  in 
an  hour  for  sale  to  the  public.  Their  owners  would  be  glad 
to  sell.  It  is  the  necessity  to  carry  such  huge  loads  of  undi¬ 
gested  Texas  securities  that  makes  the  Southwestern  systems 
financially  weak.  Suppose  your  committee  in  the  aggregate 
were  worth  ten  million  dollars  and  bought  a  million  of  stock 
and  nine  millions  of  bonds  in  securities  of  a  railroad.  Suppose 
you  then  offered  your  bonds  to  the  public  and  found  absolutely 
no  purchasers.  Suppose  then  necessities  were  daily  arising  to 
build  more  side  tracks,  ballast  the  line,  build  new  depots,  in¬ 
crease  terminal  facilities,  buy  new  equipment,  etc.  If,  as  most 
likely  would  be  the  case,  you  could  not  under  our  stock  and 
bond  law,  issue  more  bonds  to  cover  these  necessary  expendi¬ 
tures,  and  few  railroads  anywhere  earn  enough  to  take  care  of 
them,  what  would  you  do  ?  And  even  if  you  could  issue  more 
bonds  and  could  not  sell  them,  what  would  you  do? 

You  would  do  just  what  all  of  the  Southwestern  systems  are 
now  doing :  ( i )  Cut  down  the  improvements  to  the  absolute 

minimum,  and  (2)  for  such  improvements  as  must  be  made, 
put  out  your  notes  at  bank  at  the  best  rate  of  interest  obtain¬ 
able  and  “hock”  your  bonds  as  security. 

But  this  is  absolutely  the  most  expensive  form  that  financing 
can  take,  and  railroads  whose  money  necessities  must  be  cared 
for  in  that  way,  necessarily  occupy  a  weak  position  financially. 
It  accounts  for  many  things  in  connection  with  our  Texas  lines 
frequently  misunderstood  by  the  public,  and  even  by  our  rail¬ 
road  commissioners,  which  are  sometimes  attributed  by  them 
to  supposed  indifference  on  the  part  of  the  system  lines  to  the 
interests  of  or  indisposition  to  protect  their  Texas  properties. 

These  facts  are  bitterest  to  those  of  us,  your  fellow  citizens, 


12 


who  have  chosen  for  their  life-efforts  the  railroad  field.  We 
look  around  us  and  see  from  boundary  to  boundary  of  our 
grand  native  State,  landscapes  reflecting  the  smiles  of  God 
Himself ;  a  soil  the  most  fertile ;  resources  the  most  diverse,  and 
the  possibilities  of  future  development  from  new  transportation 
projects  absolutely  unparalleled  elsewhere  on  this  continent. 
But  a  man  from  Mexico,  or  Arkansas,  or  the  Dakotas,  with  a 
railroad  scheme,  can  sell  his  bonds  anywhere,  in  America  or 
Europe,  ten  for  one,  quicker  than  the  man  from  Texas.  Why, 
Texans  themselves  will  not  buy  the  stock  or  bonds  of  Texas 
railroads  nor  even  lend  them  money.  If  you  want  to  see  a 
Texas  banker  or  any  individual  with  money  to  lend  shudder, 
offer  him  the  stock  or  the  bonds  or  the  notes  of  a  Texas  rail¬ 
road.  They  probably  have  never  analyzed,  as  I  am  doing,  the 
trouble  underlying  these  securities,  but  the  experience  of  others 
has  been  enough  for  them,  and  they  know  that  if  they  come  to 
own  these  securities  they  cannot  effect  resales  of  them.  There 
is  ample  money  on  deposit  and  for  loan  in  Texas  itself  to  dupli¬ 
cate  a  large  part  of  our  entire  railroad  mileage.  But  I  assure 
you  that  aside  from  the  inadequate  resources  of  those  who 
themselves  are  promoting  that  line  of  work  not  enough  to  build 
ten  miles  is  available,  if  the  security  offered  be  the  railroad 
itself. 

Certainly,  some  railroad  mileage  has  been  built  in  Texas 
since  1893.  At  the  close  of  the  fiscal  year  1892,  there  were 
8,977  miles  of  railroad  in  Texas.  On  June  30,  1909,  the  mile¬ 
age  had  grown  to  13,1 10  miles,  an  increase  in  17  years  of  4,133 
miles,  or  46  per  cent. ;  or  at  the  rate  of  243  miles  or  2.7  per 
cent,  per  annum.  But  this  was  truly  a  bad  showing.  Texas 
has  262,290  square  miles  of  territory,  and  during  that  whole 
period  we  built  only  one  mile  of  railroad  track  per  annum  for 
each  1,080  square  miles,  or  691,200  square  acres,  of  territory. 

How  did  this  compare  with  the  State’s  development  along 
industrial  lines,  representing  all  other  departments  of  human 
activity?  The  amount  of  freight  shipped  in  1892  compared 
with  the  amount  of  freight  shipped  in  1909  is  an  excellent  illus¬ 
tration,  and  the  figures  are  as  follows : 

13 


Number  of  tons  carried  of  freight  earning  revenue 

for  year  ending  June  30,  1892 . 12,742,656 

Number  of  tons  carried  of  freight  earning  revenue 

for  year  ending  June  30,  1909 . 42,061,619 

Gross  increase:  29,318,963  tons  or  230  per  cent,  for  the 
whole  period,  and  13.5  per  cent,  on  an  average,  for  each  year 
of  that  period.  In  1892  one  ton  of  freight  was  shipped  for 
each  thirteen  acres  of  land  in  Texas;  in  1909  a  ton  of  freight 
was  shipped  for  each  four  acres. 

In  short,  freight  shipments  during  that  period,  grew  almost 
exactly  five  times  as  fast  as  the  railroads  did.  But,  you  may 
inquire,  in  view  of  the  adverse  effect  of  the  stock  and  bond 
law,  how  has  any  railroad  at  all  been  built  in  Texas  since  1893  ? 

Disagreeable  as  it  always  is,  both  to  one’s  self  and  those  who 
listen,  but  in  the  hope  it  may  serve  to  better  illustrate  this 
argument,  I  am  going  to  give  you  a  story  out  of  my  own  ex¬ 
perience  in  railroading: 

In  1903  and  1904  a  party  of  wealthy  gentlemen  at  Beaumont 
and  Port  Arthur,  joined  with  other  gentlemen  from  Columbus, 
Ohio,  and  by  subscribing  to  shares  of  approximately  $20,000 
each,  built  and  equipped  a  line  of  railroad  from  Beaumont, 
Texas,  to  Sour  Lake,  in  an  adjoining  county.  The  territory 
was  fertile  and  business  active.  But  railroading  is  the  only 
business  in  Texas  where  a  quarter  of  a  million  dollars,  no  mat¬ 
ter  how  well  invested  and  managed,  cannot  be  made  to  pay 
even  operating  expenses.  The  builders  became  disgusted,  and 
I  contracted  with  them  for  the  stock  and  bonds  on  a  basis 
much  below  the  amount  they  had  invested.  I  then  projected  an 
extension  of  the  line  to  Houston.  The  territory  to  be  inter¬ 
sected  was  the  oil,  lumber  and  rice  section,  the  heaviest  and 
most  constant  tonnage  producing  part  of  Texas.  The  termini 
at  Houston  and  Beaumont,  were  fine  cities,  89  miles  apart. 
Estimates  on  the  cost  of  construction  were  compiled,  and  I 
found  a  million  and  a  half  of  dollars  additional  to  the  original 
investment  would  be  required.  I  approached  many  moneyed 


14 


men  in  Texas  with  my  plans  (and  in  Beaumont  in  that  day 
were  men  willing  to  put  up  money  even  to  bore  for  oil  in  the 
Gulf  of  Mexico) ,  but  not  one  dollar  of  capital  could  I  find  for 
the  project  in  Texas.  I  then  went  out  into  other  states  and 
cities  and  submitted  the  underwriting  to  people  accustomed 
to  embark  on  such  enterprises.  Universally  it  was  conceded 
to  be  a  proposition  combining  every  feature  that  renders  a 
railroad  project  attractive,  a  strong  local  traffic  in  the  territory 
affected,  with  powerful  connections  to  furnish  through  business 
at  each  terminus,  and  a  level  country  to  build  through,  with 
light  grades,  and  involving  a  minimum  expenditure  for  con¬ 
struction.  I  showed  these  people  the  sworn  deposition  of  one 
of  the  greatest  railroad  men  in  the  world  that  he  himself  was 
contemplating  building  just  that  line,  and  they  themselves  had 
one  of  their  number  wait  on  the  Texas  head  of  another  system 
who  did  not  hesitate  to  say  that  if  the  line  was  built,  he  would 
urge  his  principals  to  buy  it.  My  new  found  friends  were  con¬ 
vinced,  and  we  began  to  figure  out  a  contract  whereby  they 
would  buy  the  railroad’s  securities.  This  brought  us  up  against 
the  Texas  stock  and  bond  law.  They  wanted  to  know  at  what 
amount  per  mile  we  proposed  to  bond  the  new  line  and  at  what 
figure  we  would  sell  them  such  bonds.  I  was  obliged  to  say 
that  no  man  could  say  in  advance  of  construction  at  what  fig¬ 
ure  a  Texas  railroad  could  be  bonded,  and  that  as  the  law  re¬ 
quired  that  the  aggregate  of  stock  and  bonds  should  in  no  case 
exceed  the  commission’s^  valuation,  they  would  have  to  figure 
on  paying  par  for  the  bonds.  But,  they  explained,  they  them¬ 
selves  could  not  carry  in  their  own  hands  all  the  bonds  that 
they  bought;  they  were  distributors  of  such  securities,  and  un¬ 
less  there  was  some  margin  of  profit,  there  was  nothing  in  the 
trade  for  them.  Moreover,  they  pointed  me  to  the  daily  price  lists 
of  American  railroad  securities  where  both  the  stock  and  bonds 
of  railroads  already  perfectly  successful,  never  failing  to  pay  in¬ 
terest,  could  be  had  at  prices  less  than  par,  and  asked  me  how 
I  could  expect  to  sell  them  at  par  unissued  securities  indefinite 
as  to  amount,  on  an  unborn  railroad  which  it  would  undoubt¬ 
edly  take  five  years  (and  five  years  is  a  minimum  period)  to 


15 


put  on  an  interest  paying  basis,  when  all  the  world  of  attractive 
investments  was  open  to  them  elsewhere  for  placing  money 
without  such  restrictions.  On  this  rock  we  foundered. 

Take  the  proposition  home  to  yourselves  in  every  day  life : 
Suppose  you  wanted  to  build  a  cotton  gin,  possibly  in  a  coun¬ 
try  where  as  yet  no  farmer  had  come  to  raise  cotton ;  suppose 
the  law  imposed  on  you  the  duty  to  run  your  gin  every  day 
whether  there  was  cotton  to  gin  or  not ;  suppose  you  went  to  a 
bank  to  borrow  money  in  aid  of  your  project,  the  security  for 
your  loan  to  be  the  plant  itself.  Suppose  the  bank  consented 
to  make  the  loan,  but  when  you  came  to  draw  the  note  and 
mortgage  you  were  compelled  to  say:  “No ;  I  can’t  give 
you  a  note  and  mortgage  now ;  you  let  me  have  the  money  now, 
and  I  will  build  the  gin,  and  after  it  is  built,  three  commis¬ 
sioners  will  appraise  the  value  of  the  gin,  and  after  they  have 
done  so  probably  two  or  three  or  more  years  from  now.  T  will 
then  give  you  a  note  and  mortgage  up  to  the  amount  of  their 
appraisement,  payable  thirty  years  after  date,  to  bear  not  ex¬ 
ceeding  six  per  cent,  interest,  you  to  begin  collecting  interest 
when  the  gin  begins  to  earn  enough  money  over  operating  ex- 
pnses,  to  pay  such  interest”.  Do  you  think  the  banker  would 
likely  make  the  loan  at  par  or  at  all  under  such  circumstances  ? 

This  exactly  illustrates  the  case  of  the  independent  railroad 
man  in  Texas. 

But,  it  may  be  urged  that  the  law  authorizes  promoters  of 
railroads,  after  locating  their  line,  to  file  plans  and  specifica¬ 
tions  and  estimates  of  cost  for  the  proposed  work  with  the  rail¬ 
road  commission,  and  to  obtain  from  the  commission  in  ad¬ 
vance  a  statement  of  their  valuation  on  such  railroad  to  apply 
after  it  is  constructed.  My  reply  is  that  this  provision  of  the 
law,  which  is  rarely  resorted  to,  is  of  no  practical  value.  I  am 
under  the  impression  that  this  method  was  pursued  by  Gov¬ 
ernor  Hogg  for  the  Link  Line.  I  do  not  believe  that  any  man 
can  prognosticate  in  advance,  within  safe  limits,  the  actual  cost 
of  building  any  considerable  piece  of  railroad.  Almost  univer- 


16 


sal  experience  is  to  the  contrary.  Unseasonable  weather  dur¬ 
ing  the  construction  period  alone  will  upset  the  best  calcula¬ 
tions.  On  the  construction  I  have  referred  to,  from  Sour  Lake 
to  Houston,  the  crews  of  two  work  trains  brought  them  into 
collision  head  on,  the  trains  were  wrecked,  two  men  were  killed, 
others  injured.  It  added  to  the  cost  of  construction  probably 
thirty  thousand  dollars  for  damages  and  expenses.  On  an¬ 
other  occasion  false  work  over  the  San  Jacinto  river  gave  way 
beneath  a  work  train,  and  the  train  and  a  part  of  the  crew 
went  down.  This  accident  also  added  probably  twenty-five 
thousand  dollars  to  the  cost  of  construction.  Three  times  we 
built  a  bridge  across  the  treacherous  Trinity  river,  and  twice  it 
was  swept  away  before  completion  by  floods.  But  the  commis 
sion  only  figures  on  and  allows  bonds  for  one  bridge.  I  am 
told  that  the  actual  cost  of  construction  of  this  railroad  far  ex¬ 
ceeded  the  commission’s  final  valuation.  So,  you  will  observe 
that  bond  people  figuring  to  buy  bonds  limited  by  previous  de¬ 
cree  of  the  commission,  to  build  a  railroad,  the  same  to  be  the 
sole  security  for  the  bonds,  and,  once  embarked  on  the  project, 
absolutely  bound  to  continue  producing  money  to  protect  their 
investment  until  the  project  is  consummated,  clearly  discern 
that  a  previous  valuation  by  the  commission  is  no  guarantee 
that  the  issue  of  securities  will  even  cover  the  cost  of  the  fin¬ 
ished  work,  and  the  subsequent  valuation  by  the  commission 
according  to  the  present  law,  does  not  ordinarily  extend  to 
cover  casualties  of  the  sort  above  mentioned.  Yet  such  things 
are  common  to  railroad  construction,  and  must  be  anticipated 
by  railroad  builders,  whether  anticipated  by  the  law  or  not. 

But  I  did  build  the  line  mentioned  from  Sour  Lake  to  Hous¬ 
ton.  But  how?  As  an  employee.  I  wanted  to  build  it,  own 
it,  extend  it  and  keep  it,  and  make  it  the  nucleus  of  a  larger 
line.  If  I  had  been  operating  anywhere  in  the  world  but 
Texas,  I  would  have  done  it. 

But  when  I  could  not  myself  raise  money  on  the  project’s 
intrinsic  merits,  nothing  remained  for  me  to  do  but  sell  the 
railroad  we  had  already  built  out  of  our  own  pockets  to  an  ex- 


17 


isting  system,  which  I  did  within  thirty  days  thereafter,  of 
such  obvious  merit  was  the  propect.  Then  I  was  employed  to 
carry  out  my  own  plans.  But  how  was  the  money  provided? 
By  absolutely  the  only  means  that  any  considerable  money  has 
been  raised  for  Texas  railroad  construction  since  the  passage 
of  the  Texas  stock  and  bond  law:  The  system  of  railroad  to 
which  I  sold,  not  being  subject  to  the  laws  of  Texas,  simply 
sold  its  own  securities,  after  the  regular  business-like  manner 
followed  everywhere  in  the  world  but  in  Texas,  put  the  money- 
in  the  bank,  and  sent  it  down  as  it  was  needed  to  build  the  rail¬ 
road.  Up  to  the  last  time  I  had  heard  of  the  matter,  they  had 
not  yet  even  issued  the  stock  and  bonds  of  the  Texas  corpora¬ 
tion.  They  were  of  no  direct  consequence,  and  when  issued, 
will  never  go  on  the  market,  but  will  be  deposited  in  the  vaults 
of  some  trust  company,  as  far  as  they  will  go,  as  collateral  for 
the  loan,  which  was  made,  not  against  them,  but  in  fact  on  the 
credit  of  the  main  parent  company. 

And  this  is  the  process  by  which  it  has  been  possible  for  the 
old  system  lines  to  take  care  of  about  200  miles  of  track  con¬ 
struction  per  annum  in  Texas  since  the  passage  of  the  stock 
and  bond  law ;  and  this  is  the  means  also  by  which  they  finance 
the  purchase  of  our  little  independent  lines  when  we  grow 
weary  of  our  struggles  and  being  unable  to  sell  our  securities 
to  investors,  at  last  gladly  let  go  for  whatever  we  can  get  from 
our  big  brethren. 

And  yet,  it  is  the  policy  of  Texas  to  encourage  independent 
enterprise,  and  strong  objection  is  urged  in  some  quarters 
against  the  ownership  of  Texas  railroads  by  outside  railroad 
companies.  No  other  condition  can  or  will  ever  exist  so  long 
as  our  stock  and  bond  law  remains  unamended,  and  if  ever  a 
ban  be  put  on  the  ownership  of  Texas  railroads  by  outside 
systems,  not  only  will  all  growth  of  the  big  lines  stop,  but  when 
our  small  lines  get  ready  to  give  up  the  ghost,  instead  of  selling 
out  to  the  nearest  system  for  some  price,  they  will  go  into  the 
hands  of  receivers  and  stay  there. 


18 


I  want  to  furnish  another  illustration,  and  regret  that  I  must 
again  refer  to  my  own  experiences,  to  illustrate  why  and  how 
it  is  that  the  stock  and  bond  law  is  putting  all  independent 
mileage  in  Texas  out  of  the  hands  of  independent  owners  and 
into  the  ownership  of  the  big  systems : 

A  couple  of  years  or  more  ago,  I  conceived  an  ambition  to 
put  together  a  line  of  railroad  from  New  Mexico,  running 
diagonally  across  the  State  of  Texas,  to  deep  water  on  the  Gulf 
at  Beaumont,  Port  Arthur  or  Sabine  Pass.  On  looking  over 
the  situation,  I  found  two  existing  railroads  which  were  in  line 
for  the  project,  the  Beaumont  &  Great  Northern,  running  from 
Livingston,  in  Polk  county,  to  Trinity,  in  Trinity  county,  and 
the  Texas  Central,  running  from  Waco  out  to  Rotan,  in  the 
Panhandle.  Associating  J.  M.  West,  of  Houston,  we  bought 
the  Beaumont  &  Great  Northern ;  we  then  went  after  the 
Texas  Central.  That  line  was  valued  by  the  railroad  commis¬ 
sion  for  stock  and  bond  purposes  in  1894,  at  $13,323.50  per 
mile.  Since  that  time  it  had  been  extended  and  bettered,  and 
in  my  opinion  was  one  of  the  most  perfect  pieces  of  railroad 
physically,  in  the  State  of  Texas.  It  had  extended  its  line,  and 
the  later  valuations  on  these  extensions  brought  into  the  aver¬ 
age,  plus  the  commission’s  allowance  for  subsequent  better¬ 
ments  and  considerable  new  equipment,  including  owned  sleep¬ 
ing  cars,  had  brought  the  commission’s  valuation  for  stock  and 
bond  purposes,  up  to  $5,202,668,  or  $19,412  per  mile.  In  my 
opinion,  it  was  reasonably  worth  $25,000  per  mile,  at  which  the 
owners  had  for  years  held  it.  After  protracted  negotiations, 
Mr.  West  and  myself  acquired  an  option  on  all  of  the  stock, 
and  set  out  to  finance  the  purchase,  leaving  to  a  later  date  the 
financing  of  the  construction  of  the  gaps  between  Waco  and 
Trinity  and  Livingston  and  Beaumont,  and  the  extension 
northwest  from  Rotan.  It  was  the  most  attractive  railroad 
proposition  on  the  map  of  the  whole  Southwest. 

But  again  we  met  the  stock  and  bond  law.  The  Texas 
Central  purchase  simply  could  not  be  financed  by  issuing  se¬ 
curities  up  to  the  commission’s  valuation.  The  line  was  worth 


19 


a  million  dollars  over  their  valuation.  But  no  securities  to  rep¬ 
resent  that  margin  could  be  issued.  We  therefore  simply  re¬ 
sold,  and  of  course  it  was  taken  over  by  an  old  system  line. 

Now  how  was  its  purchase  financed  by  the  system  line? 
Consistently  with  the  only  possible  practice,  as  I  have  hereto¬ 
fore  described  it :  By  putting  out  its  own  short  time  notes,  de¬ 
positing  the  stock  purchased  as  collateral,  and  producing  ouc 
of  its  other  assets  additional  collateral  to  cover  the  margin. 

We  then  sold  our  east  Texas  line,  and  dropped  our  plans. 

It  is  my  understanding  that  those  who  purchased  from  us 
set  out  to  carry  them  out,  in  whole  or  in  part.  The  Texas 
Central  financing  was  on  short  time  paper ;  they  set  about  sub¬ 
stituting  bonds  in  lieu  of  most  of  the  stock  purchase,  and  to 
make  a  new  mortgage  to  cover  same,  and  additional  bonds  to 
provide  for  the  extensions.  In  the  midst  of  the  transac¬ 
tion,  our  legislature  passed  the  law  giving  preference  to  unse¬ 
cured  claims  over  mortgage  liens,  (commonly  referred  to  as 
the  I.  &  G.  N.  claim  bill).  The  effect  on  Texas  bonds 
was  disastrous  and  they  are  not  now  very  good  even  as  col¬ 
lateral.  It  is  probably  extremely  fortunate  for  the  M.,  K.  &  T. 
main  system  that  its  credit  is  strong  enough  to  enable  it  to 
absorb  into  its  general  financing  the  notes  it  gave  to  buy  the 
Texas  Central.  It  is  also  extremely  fortunate  for  me  that  I 
did  not  succeed  in  placing  a  similar  line  of  notes.  I  could  not 
have  survived  so  terrific  a  blow  at  my  underlying  collateral. 
I  would  have  been  ruined. 

Experience  has  thoroughly  convinced  me  that  the  idea  that 
the  stock  and  bond  law,  “squeezing  the  water”  out  of  Texas 
stocks  and  bonds,  would  render  them'  sought  after,  is  a  fallacy. 
It  not  only  squeezes  the  water  out,  but  it  also  squeezes  all 
chance  for  profit  out  of,  and  the  practical  certainty  of  loss  into, 
our  stocks  and  bonds.  If  you  take  out  of  a  business  all  hope 
of  profit  for  promoters,  promoters  will  abandon  that  business, 
and  only  those  already  in  the  business  will  extend  their  in¬ 
vestments. 


20 


If  you  say  to  new  investors  that  they  must  expect  to  put  up 
par  value  or  probably  more  than  par,  now,  in  order  to  get  sev¬ 
eral  years  from  now  the  stock  and  bonds  of  a  railroad  at  pres¬ 
ent  unbuilt,  proposed  to  be  constructed  in  an  undeveloped  sec¬ 
tion  of  Texas,  when  at  the  same  time  those  same  investors  are 
daily  receiving  offerings  of  the  securities  of  existing  success¬ 
ful  systems  quoting  such  securities  frequently  below  par,  what 
chance  is  there  to  interest  such  investors  in  the  Texas  proposi¬ 
tion?  This  is  exactly  our  attitude  under  our  stock  and  bond 
law. 

The  bill  you  have  under  consideration  if  passed  will  help  us 
very  greatly.  It  will  not  remove  all  of  our  difficulties,  but  it 
will  remove  some  of  them.  It  will  authorize  the  commission, 
in  valuing  railroads  for  stock  and  bond  purposes,  to  consider 
the  same  elements  of  value  that  make  a  live,  ambitious  human 
being  of  greater  value  in  the  world  than  the  cold  corpse  com¬ 
posed  of  the  same  material,  but  dead.  Physical  valuation  as 
now  practiced  under  our  law,  for  stock  and  bond  purposes  re¬ 
gards  only  the  corpse  of  a  railroad ;  the  law  so  providing  was 
passed  in  1893,  under  a  mistake  and  does  not  tit  existing  con  ¬ 
ditions.  The  State  has  changed  its  policy  and  for  the  purpose 
of  taxation,  now  regards  the  values  of  the  living,  going  con¬ 
cerns. 

The  idea  which  underlay  the  enactment  of  our  stock  and 
bond  law,  was  antagonism  to  the  evils  of  over-capitalization. 
Over-capitalization  is  an  evil ;  but  the  law  went  to  the  opposite 
extreme,  and  like  all  too  radical  remedies,  has  created,  as  I 
have  heretofore  described,  an  equally  pernicious  evil  by  pre¬ 
venting  railroads  from  capitalizing  up  to  their  necessary  re¬ 
quirements. 

On  June  30,  1909,  there  were  12,847. 12  miles  of  main  track 
in  Texas. 

The  amounts  reported  to  the  railroad  commission  by  the 
railroads  from  time  to  time  in  reports  sworn  to  by  their  ac¬ 
countants  as  the  total  cost  of  construction  and  equipment,  down 


21 


to  June  30,  1909,  aggregated  $515,211,981,  or  an  average  of 
$40,100  per  mile.  The  aggregate  amount  of  the  values  placed 
on  those  same  lines  by  the  railroad  commission  for  stock  and 
bond  purposes,  was  $212,794,536,  or  $16,560  per  mile.  At 
the  same  time  for  the  same  year  the  values  at  which  all  of  these 
same  lines  appeared  on  the  State  and  County  tax  rolls  was 
$326,684,008,  or  $25,425  per  mile.  These  figures  are  taken 
from  Table  No.  13  of  Appendix  1,  to  the  1909  report  of  the 
railroad  commission. 


The  following  is  a  table  of  some  of  the  most  striking  dis¬ 
crepancies  between  the  values  fixed  by  the  railroad  commis¬ 
sion  for  stock  and  bond  purposes  and  those  fixed  by  the  State 
tax  commission  in  connection  with  the  tax  assessors  of  the  sev¬ 
eral  counties,  for  1909,  for  the  purposes  of  taxation: 


Fort  Worth  &  Denver  City . 

$  5,771,582 

$  15,604,139 

$  9,832,557 

Galveston,  Harrisburg  &  San 

Antonio  . 

.  20,776,779 

46,474,731 

25,697,252 

Galveston,  Houston  &  Henderson 

1,527,023 

2,458,945 

931,922 

Gulf  Colorado  &  Santa  Fe . 

17,936,030 

30,379,259 

12,443,229 

Gulf  Beaumont  &  Kansas  City.... 

676,484 

1,672,479 

995,995 

Cana  Belt  . 

830,967 

2,361,316 

1,530,349 

Houston,  East  &  West  Texas . 

.  2,042,692 

4,675,673 

2,632,981 

Houston  &  Texas  Central  . 

13,683,834 

25,165,808 

11,481,974 

International  &  Great  Northern.. 

20,986,997 

28,724,077 

7,737,080 

Missouri,  Kans.  &  Tex.  of  Texas 

17,594,779 

34,768,253 

17,173,474 

Pecos  &  Northern  Texas  . 

.  1,486,506 

2,408,887 

922,381 

St.  Louis  Southwestern  of  Tex... 

.  10,350,186 

11,683,076 

1,332,890 

San  Antonio  &  Aransas  Pass . 

9,017,423 

16,352,238 

7,334,815 

Texarkana  &  Ft.  Smith  (in  Tex.) 

1,603,788 

3,136,266 

1,532,478 

Texas  &  New  Orleans . 

.  8,913,425 

15,990,065 

7,076,640 

Texas  &  Pacific  in  Texas . 

.  17,730,689 

38,493,092 

20,362,403 

Texas  Central  . 

3,698,452 

4,102,459 

404,007 

Wichita  Valley  . 

486,768 

1,366,196 

879,428 

$155,114,404 

$285,416,959 

$130,302,555 

Those  values  still  stand  on  the  books  of  the  commission  un¬ 
disturbed,  the  commission  holding  that  it  has  neither  the  au¬ 
thority  under  the  law  as  it  is,  nor  the  means,  to  make  re¬ 
valuations. 

The  railroad  commission’s  valuations  when  made,  and  most 
of  them  were  made,  in  1894  and  1895,  purported  to  cover  only 


22 


the  value  of  the  physical  properties  then  owned  by  the  rail¬ 
roads,  which  is  to  say,  the  value  of  the  material  of  those  rail¬ 
roads  in  position,  and  the  equipment. 

To  give  you  an  idea  of  the  values  fixed  on  railroads  at  that 
time  and  how  those  values  compare  with  the  values  now  fixed 
on  same  for  taxation,  I  quote  the  following  figures  per  mile  on 
some  of  the  important  lines,  the  appraisement  including  not 
only  road  and  fixtures,  but  also  equipment: 


Date 

Com. 

Taxed  in 

Com.  Val. 

Valuation. 

1909  at 

Fort  Worth  &  Denver  City . 

.  1894 

$12,708 

$34,355 

Galveston,  Harrisburg  &  San  Antonio.... 

.  1894 

17,602 

34,890 

Gul  Colorado  &  Santa  Fe . 

.  1895 

17,140 

28,945 

Galveston,  Houston  &  Henderson  . 

.  1895 

31,259 

*  52,089 

Houston  &  Texas  Central  . 

.  1894 

21,186 

31,895 

Houston,  East  &  West  Texas  . 

.  1895 

10,698 

24,487 

International  &  Great  Northern . 

.  1895 

18,051 

25,969 

Missouri,  Kansas  &  Texas  . 

.  1894 

15,968 

30,395 

St.  Louis  Southwestern  of  Texas . 

.  1894 

16,049 

16,805 

San  Antonio  &  Aransas  Pass . 

.  1894 

12,618 

22,592 

Texas  &  Pacific  . 

.  1894 

17,057 

36,692 

Texas  Central  . 

.  1894 

13,323 

15,307 

Wichita  Valley  . 

.  1894 

9,477 

26,172 

I  have  quoted  these  figures  to  show  you  how  just  it  is  to  pass 
this  bill  proposing  ( i )  to  authorize  periodical  revaluations  of 
railroads,  and  (2)  to  make  the  valuations  for  stock  and  bond 
purposes  include  every  element  of  value  considered  by  the 
State  for  the  purposes  of  taxation. 

I  do  not  know  whether  the  valuations  fixed  on  the  proper¬ 
ties  of  the  railroads  by  the  commission  in  1894-5  were  fair  or 
unfair.  Be  that  as  it  may,  I  do  believe  that  the  values  fixed 
by  the  State  tax  board  today  are  actually  less  than  the  real 
values  of  those  lines  today.  The  spectacle,  viewed  from  the 
standpoint  of  the  people  whom  railroad  builders  must  interest 
if  they  would  build  railroads,  of  Texas  holding  to  one  valua¬ 
tion  for  stock  and  bond  and  rate  making  purposes,  and  fixing 
another  more  than  twice  as  high  for  the  purposes  of  taxation, 
is  one  that  so  long  as  it  continues,  would  paralyze  the  genius  of 
Hill  or  Harriman,  were  they  young  and  setting  out  on  their 
careers  in  this  field. 


23 


There  are  only  a  few  of  us  left  in  Texas  with  hardihood  to 
continue  our  struggles  for  the  development  of  independent 
railroad  projects.  Out  in  the  Panhandle  at  Dalhart,  Mr. 
Wiest’s  little  line  has  gone  into  the  hands  of  a  receiver;  down 
at  Bartlett,  the  Bartlett  &  Florence  line  is  in  the  hands  of  a 
receiver;  at  Temple  their  new  line  to  the  northwest  is  in  trou¬ 
ble;  Sam  Lazarus  with  his  Acme,  Quanah  &  Pacific,  Wm. 
Carlisle  with  his  Beaumont  &  Great  Northern;  Morgan  Jones 
and  associates  with  the  Abilene  &  Southern,  Kell  &  Kemp  with 
their  Wichita  Falls  lines,  and  a  few  others  are  battling  bravely 
against  many  difficulties  for  the  development  of  their  sections 
of  Texas.  These  men  have  put  their  private  fortunes  under 
their  projects  and  to  do  so  takes  the  courage  of  heroes.  In  the 
development  of  the  State’s  railroad  policy  the  attitude  and 
work  of  these  men  should  be  remembered,  lest  they  be  ground 
to  death  between  the  upper  and  nether  millstones. 

In  conclusion,  I  would  add  that  I  have  personal  knowledge 
of  negotiations  that  were  lately  under  way  contemplating 
putting  together  of  old  lines  and  the  construction  of  new  mile¬ 
age  which  would  create  a  new  and  important  route  through 
this  State.  The  old  mileage  sought  to  be  included  is  today- 
valued  by  the  commission  for  stock  and  bond  purposes  at 
fourteen  thousand  dollars  per  mile  less  than  the  valuation  of 
the  State  tax  board ;  the  proposed  purchasers  might  see  their 
way  clear  to  buy  on  the  basis  of  the  tax  board  valuation.  But 
it  cannot  be  done  unless  the  lines  can  be  capitalized  for  that 
amount.  What  becomes  of  the  transaction  will  depend  largely 
on  the  action  of  this  legislature  with  reference  to  the  bill  now 
before  you. 


24 


APPENDIX. 


Smyth  vs.  Ames,  169  U.  S.,  466,  (18  Sup.  Ct.  Reports, 
418).  (Affirming  64  Federal,  165).  (Decided  by  the  Su¬ 
preme  Court  March  7th,  1898),  (43  Lawyer’s  Edition,  819). 

In  San  Diego  Land  and  Town  Co.  vs.  City  of  National  City, 
(174  U.  S.,  742;  42  Lawyer’s  Edition,  1155;  decided  May 
22nd,  1899)  the  principle  under  consideration  is  re-announced, 
as  follows: 

“What  elements  are  involved  in  the  general  inquiry  as  to  the 
reasonableness  of  rates  established  by  law  for  the  use  of  prop¬ 
erty  by  the  public  ?  This  question  received  much  consideration 
in  Smyth  vs.  Ames,  above  cited.  That  case,  it  is  true,  related 
to  rates  established  by  a  statute  of  Nebraska  for  railroad  com¬ 
panies  doing  business  in  that  State.  But  the  principles  involved 
in  such  a  case  are  applicable  to  the  present  case.  It  was  there 
contended  that  a  railroad  company  was  entitled  to  exact  such 
charges  for  transportation  as  would  enable  it  at  all  times,  not 
only  to  pay  operating  expenses,  but  to  meet  the  interest  reg¬ 
ularly  accruing  upon  all  its  outstanding  obligations  and  justify 
a  dividend  upon  all  its  stock;  and  that  to  prohibit  it  from  main¬ 
taining  rates  or  charges  for  transportation  adequate  to  all 
thosie  ends  would  be  a  deprivation  of  property  without  due  pro¬ 
cess  of  law,  and  a  denial  of  the  equal  protection  of  the  laws. 
After  observing  that  this  broad  proposition  involved  a  mis¬ 
conception  of  the  relations  between  the  public  and  a  railroad 
corporation,  that  such  a  corporation  was  created  for  public  pur¬ 
poses,  and  performed  a  function  of  the  State,  and  that  its  right 
to  exercise  the  power  of  eminent  domain  and  to  charge  tolls 
was  given  primarily  for  the  benefit  of  the  public,  this  court 
said:  Tt  cannot,  therefore,  be  admitted  that  a  railroad  cor¬ 
poration  maintaining  a  highway  under  the  authority  of  the 
State  may  fix  its  rates  with  a  view  solely  to  its  own  interests, 
and  ignore  the  rights  of  the  public.  But  the  rights  of  the  pub¬ 
lic  would  be  ignored  if  rates  for  the  transportation  of  persons 
or  property  on  a  railroad  are  exacted  without  reterence  to  the 


25 


fair  value  of  the  property  used  for  the  public  or  the  fair  value 
of  the  services  rendered,  but  in  order  simply  that  the  corpora¬ 
tion  may  moet  operating  expenses,  pay  the  interest  on  its  obli  ¬ 
gations,  and  declare  a  dividend  to  stockholders.  If  a  railroad 
corporation  has  bonded  its  property  for  an  amount  that  ex¬ 
ceeds  its  fair  value,  or  if  its  capitalization  is  largely  fictitious, 
it  may  not  impose  upon  the  public  the  burden  of  such  increased 
rates  as  may  be  required  for  the  purpose  of  realizing  profits 
upon  such  excessive  valuation  or  fictitious  capitalization;  and 
the  apparent  value  of  the  property  and  franchises  used  by  the 
corporation,  as  represented  by  its  stocks,  bonds,  and  obliga¬ 
tions,  is  not  alone  to  be  considered  when  determining  the  rates 
that  may  be  reasonably  charged.’  169  U.  S.,  544  (42:848). 
In  the  same  case  it  was  also  said  that  ‘the  basis  of  all  calcula¬ 
tion  as  to  the  reasonableness  of  rates  to  be  charged  by  a  cor¬ 
poration  maintaining  a  highway  under  legislative  sanction 
must  be  the  fair  value  of  the  property  used  by  it  for  the  con¬ 
venience  of  the  public.  And  in  order  to  ascertain  that  value, 
the  original  cost  of  construction,  the  amount  expended  in  per¬ 
manent  improvements,  the  amount  and  market  value  of  its 
bonds  and  stock,  the  present  as  compared  with  the  original 
cost  of  construction,  the  probable  earning  capacity  of  the  prop¬ 
erty  under  particular  rates  prescribed  by  statute,  and  the  sum 
required  to  meet  operating  expenses,  are  all  matters  for  con¬ 
sideration,  and  are  to  be  given  such  weight  as  may  be  just  and 
right  in  each  case.  We  do  not  say  that  there  may  not  be  other 
matters  to  be  regarded  in  estimating  the  value  of  the  property. 
What  the  company  is  entitled  to  ask  is  a  fair  return  upon  the 
value  of  that  which  it  employs  for  the  public  convenience.  On 
the  other  hand,  what  the  public  is  entitled  to  demand  is  that  no 
more  be  exacted  from  it  for  the  use  of  a  public  highway  than 
the  services  rendered  by  it  are  reasonably  worth.’  169  U  .S.. 
546  (42:819). 

“This  court  had  previously  held  in  Covington  &  Lexington 
Turnpike  Road  Company  vs.  Sandford,  164  IT.  S.,  578,  596, 
598  (41  :56o,  566,  567) — which  case  involved  the  reasonable¬ 
ness  of  rates  established  by  legislative  enactment  for  a  turnpike 

26 


company — that  a  corporation  performing  public  services  was 
not  entitled,  as  of  right  and  without  reference  to  the  interests 
of  the  public,  to  realize  a  given  per  cent,  upon  its  capital  stock ; 
that  stockholders  were  not  the  only  persons  whose  rights  or 
interests  were  to  be  considered,  and  that  the  rights  of  the  pub¬ 
lic  were  not  to  be  ignored.  The  court  in  that  case  further  said : 
‘Each  case  must  depend  upon  its  special  facts;  and  when  a 
court,  without  assuming  itself  to  prescribe  rates,  is  required  to 
determine  whether  the  rates  prescribed  by  the  legislature  for 
a  corporation  controlling  a  public  highway  are,  as  an  entirety, 
so  unjust  as  to  destroy  the  value  of  its  property  for  all  the  pur¬ 
poses  for  which  it  was  acquired,  its  duty  is  to  take  into  consid¬ 
eration  the  interests  both  of  the  public  and  of  the  owner  of  the 
property,  together  with  all  other  circumstances  that  are  fairly 
to  be  considered  in  determining  whether  the  legislature  has, 
under  the  guise  of  regulating  rates,  exceeded  its  constitutional 
authority,  and  practically  deprived  the  owner  of  property  with¬ 
out  due  process  of  law.  *  *  *  The  utmost  that  any  corpora¬ 
tion  operating  a  public  highway  can  rightfully  demand  at  the 
hands  of  the  legislature,  when  exerting  its  general  powers,  is 
that  it  receives  what  under  all  the  circumstances  is  such  com¬ 
pensation  for  the  use  of  its  property  as  will  be  just  both  to  it 
and  to  the  public/ 

“These  principles  are  recognized  in  recent  decisions  of  the 
Supreme  Court  of  California,  San  Diego  Water  Co.  vs.  City  of 
San  Diego  (1897),  118  Cal.,  556  (38  L.  R.  A.,  460)  ;  Red¬ 
lands  L.  &  C.  Domestic  Water  Co.  vs.  City  of  Redlands 
(1898),  (12 1  Cal.,  365)  ;  53  Pac.,  843,  844. 

“The  contention  of  the  appellant  in  the  present  case  is  that 
in  ascertaining  what  are  just  rates  the  court  should  take  into 
consideration  the  cost  of  its  plant;  the  cost  per  annum  of  op¬ 
erating  the  plant;  including  interest  paid  on  money  borrowed 
and  reasonably  necessary  to  be  used  in  constructing  the  same ; 
the  annual  depreciation  of  the  plant  from  natural  causes  re¬ 
sulting  from  its  use ;  and  a  fair  profit  to  the  company  over  and 
above  such  charges  for  its  services  in  supplying  the  water  to 


27 


consumers,  either  by  way  of  interest  on  the  money  it  has  ex¬ 
pended  for  the  public  use,  or  upon  some  other  fair  and  equit¬ 
able  basis.  Undoubtedly,  all  those  matters  ought  to  be  taken 
into  consideration,  and  much  weight  be  given  them,  when  rates 
are  being  fixed,  as  under  all  the  circumstances  will  be  just  to 
the  company  and  to  the  public.  The  basis  of  calculation  sug¬ 
gested  by  the  appellant  is,  however,  defective  in  not  requiring 
the  real  value  of  the  property  and  the  fair  value  in  themselves 
of  the  services  rendered  to  be  taken  into  consideration.  What 
the  company  is  entitled  to  demand,  in  order  that  it  may  have 
just  compensation,  is  a  fair  return  upon  the  reasonable  value 
of  the  property  at  the  time  it  is  being  used  for  the  public.  The 
property  may  have  cost  more  than  it  ought  to  have  cost,  and 
its  outstanding  bonds  for  money  borrowed  and  which  went 
into  the  plant  may  be  in  excess  of  the  real  value  of  the  prop¬ 
erty.  So  that  it  cannot  be  said  that  the  amount  of  such  bonds 
should  in  every  case  control  the  question  of  rates,  although  it 
may  be  an  element  in  the  inquiry  as  to  what  is,  all  the  circum¬ 
stances  considered,  just  both  to  the  company  and  to  the 
public.” 

In  the  case  of  Chicago,  etc.,  Ry.  vs.  Tompkins,  90  Federal, 
368  (North  Dakota),  the  Circuit  Court  of  Appeals  discuss 
the  principles  at  length  (opinion  delivered  by  that  court  July 
6th,  1898),  citing  Smyth  vs.  Ames,  and  then  proceeding  upon 
the  principle,  make  a  calculation  from  the  record  in  order  to 
arrive  at  the  reasonableness  of  the  rate.  When  the  case 
reached  the  Supreme  Court,  176  U.  S.,  168  (44  Lawyer’s  Edi¬ 
tion,  417),  (decided  January  22nd,  1900),  the  principle  under 
consideration  was  not  discussed,  but  the  Supreme  Court  pro  ¬ 
ceeded  at  once  to  consider  the  actual  value  of  the  properties 
of  the  railroad  in  question  and  its  gross  receipts,  expenditures, 
etc.,  and  although  the  matter  of  outstanding  bonded  indebted¬ 
ness  in  excess  of  such  values  was  in  the  case,  it  received  no 
consideration  by  the  Supreme  Court  in  passing  upon  the  rea¬ 
sonableness  of  the  rate  in  question.  The  Supreme  Court  re¬ 
versed  the  case  because  the  calculation  seemed  not  based  upon 


28 


sufficient  facts  and  directed  that  a  master  be  appointed  to  in¬ 
quire  more  minutely  into  gross  receipts  and  expenditures  of 
the  railroad  in  question. 

In  Chicago,  etc.,  Traction  Co.  vs.  City  of  Chicago,  65 
Northeastern,  470,  the  Supreme  Court  of  Illinois  followed 
Smyth  vs.  Ames.  Decided  by  the  Supreme  Court  of  Illinois, 
Oct.  25th,  1902. 

In  Mathews  vs.  Corporation,  etc.,  106  Federal,  8  (decided 
Feb.  5th,  1901),  the  United  States  Circuit  Court  of  North 
Carolina  follows  Smyth  vs.  Ames. 

In  Northern  Pacific  Railroad  Co.  vs.  Keyes,  91  Federal,  49 
(decided  December  23rd,  1898),  and  other  cases  decided  since 
that  year,  the  elements  that  enter  into  the  consideration  of  the 
reasonableness  of  a  rate  are  mentioned  and  the  stock  liability 
and  bonded  indebtedness  are  not  among  them. 


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